The monster of healthcare inflation reared its ugly head several times during the past 25 years. Each time it was beaten back with the help of purchasers and payers. But the beast certainly has not been slain.
One spike in health costs hit from 1981 through 1984, a time when hospitals and doctors were given free rein to determine how best to treat their patients. Because the prices that providers charged for their services varied widely and often capriciously, healthcare insurance premiums climbed nearly 90% during the four-year period.
Insurers began cracking down on providers' spending by requiring pre-admission certification and utilization reviews. Taking their cue from the federal Medicare program-which in 1983 turned to DRGs, abandoning its policy of reimbursing each provider for the full costs of treating Medicare patients-insurers also began paying hospitals and doctors predetermined fees.
Meanwhile, employers sought to control premium increases by forcing employees to share a greater proportion of their healthcare bills through increased copayments and deductibles. They also turned to HMOs and PPOs.
But by the late 1980s, healthcare costs began to skyrocket again. Because of a confluence of factors-ranging from medical overutilization to a growing number of empty hospital beds-insurance premiums rose some 74% from 1988 to 1992. This time, insurers fought back by negotiating capitated contracts, which forced providers to take on the financial risk of treating patients. By 1999, 74% of provider contracts were capitated. For their part, employers continued to shift more of the costs to their employees.
Since 1998, healthcare premiums have begun to climb steadily, largely because of the soaring cost of prescription drugs. With providers fighting back against capitation-it now accounts for just 57% of contracts-payers have resorted to some new cost-containment methods, including tiered drug formularies and another round of premium increases.